Reducing illicit trade

WHILE it is positive that Malaysia is projected to be the world's 24th most powerful economy in the world by 2050, as Prime Minister Datuk Seri Najib Abdul Razak announced two months ago, attention must also be turned to what could likely derail these efforts altogether: The grossly understudied illicit trade in the country.

The cost of illicit trade to the Malaysian economy generally is difficult to measure. But the Organisation for Economic Co-operation and Development has estimated the cost to be around US$250 billion, while the International Anti-Counterfeiting Coalition estimates the figure to be US$600 billion per annum, as of 2015. Illicit trade seems to be growing in scope and magnitude due to freer movement of goods and internet usage.

A separate study also estimated that Penang lost approximately RM16 million in uncollected taxes due to illegal economic activities in the state in a single year, based on confiscated products including cigarettes, food and beverages, motor vehicles and electrical machinery. The fact that these trading activities are taking place under the radar means that authorities are unable to capture the economic value – namely, taxes – that otherwise would contribute to the overall gross domestic product and economic growth.

It also adversely affects the film and entertainment industries. A local filmmaker once reportedly lost a projected revenue of up to RM15 million as a result of pirate DVDs, sold before the movie was even released. A separate study has shown that an increase of 15% in takings for the local box office is possible if piracy was completely stamped out.

Another significant impact of illicit trade is that it contributes to the loss of jobs in the formal sector. As it thrives, the means and networks that facilitate the movement of these goods and services tend to also build close relationships with organised crime syndicates.

A recent policy paper by IDEAS has shed new light on several sectors in Malaysia whose industries are increasingly affected by the rise of illicit trade, including music, cigarettes, alcohol, branded products as well as medicines. One of the most startling statistics is that contraband cigarettes account for 57.1% of cigarettes consumed in 2016.

Although efforts have been taken to clamp down on illegal traders, primarily by the Royal Malaysian Customs, more important questions must be asked about the overarching regulatory framework that governs the economy. Have regulations improved or reduced the efficacy of reducing illicit trade in the country?

To answer that, one must examine the factors that led to the flourishing of illicit trade. First, a critical factor, is how rigorous enforcement is by the relevant authorities. Lack of transparency and border corruption are among the most important influences of poor enforcement. It is here that Malaysia could do with improvement; the lack of transparency and efficient enforcement has earned us the fourth biggest online piracy hub in the world.

Second, cumbersome business regulations also lead to worsening illicit trade. The Global Enabling Trade Report 2014 by the World Economic Forum listed tariffs, burdensome import procedures, domestic technical requirements and standards, as well as corruption at the border, as the most problematic factors for Malaysia.

Although tariffs are a form of raising revenue for the government's own expenditure, there must be wise policy decision-making in deciding rates. The rapid increase in illicit cigarette consumption directly corresponded to the excise increase on cigarettes, especially between 2014 and 2016. The government must be able to balance its own policy targets with other negative consequences, in this case where both black-market traders and consumers are incentivised to turn to cheaper contraband products.

The paper lists down several recommendations that could be adopted by the government in its fight against illicit trade. Although we are ranked 6th in the Illicit Trade Environment Index 2016 among countries engaged in preventing illicit trade, which means we are tackling the situation already, much more should be done.

First, the government's taxation policies could be reviewed. Second, examining with the aim of reducing price gaps between legitimate and illicit products can be done, but the trick would be to do this in a market-driven way.

Other measures include increasing enforcement activities, using technology to authenticate products to prevent counterfeit goods and finally, and perhaps most importantly, improving the relationship between the government – whether the relevant ministries or the Customs Department – the private sector and independent professional organisations.

Having meaningful consultations through formal or informal committees is an ideal way to ensure that data is being transparently and regularly communicated to each party, in joint and collaborative efforts in combating illicit trade.

Tackling it is an equally crucial part of growing the Malaysian economy, which policy-makers ought to pay careful attention to.